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House price increases 'risk creating an economic underclass'

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Fuseworks Media
Fuseworks Media

There was a big jump in the lower quartile house price in Auckland last month, putting the dream of home ownership further out of reach for first home buyers, according to interest.co.nz's Home Loan Affordability Report.

The report shows the lower quartile selling price in Auckland was $629,500 in February, up $33,800 or 6% from $595,700 in January. That means Auckland prices have now recovered virtually all of the ground they lost over the Christmas/New Year period and are within $1000 of their all time high.

Auckland's lower quartile house price peaked at $630,500 in September last year and then declined to $595,700 in January.

The lower quartile selling price is already sitting at all time highs in five other regions: Waikato/Bay of Plenty, Wellington, Nelson/Marlborough, Central Otago Lakes and Southland.

Although lower quartile prices declined in three regions last month - Northland, Taranaki and Otago - the general trend has been for them to be sitting at or near their all time highs throughout the country.

Nationally the lower quartile price (the price point at which 25% of sales in that month were below that figure and 75% were above it) was $300,000 in February compared to the record high of $310,000 in December last year.

Auckland the only region where housing is seriously unaffordable for first home buyers

However in spite of rising prices around the country, Auckland remains the only region where housing is seriously unaffordable for first home buyers.

The Home Loan Affordability Report calculates how much a typical first home buying couple (a couple where both are aged 25-29 years and working full time) would have to set aside each week to make the mortgage payments on a lower quartile priced house, and compares that to their median take home pay based on the pay rates in Statistics NZ's Linked Employer-Employee Data Survey.

This shows that the median take home pay for typical first home buying couples in Auckland was $1579.50 a week in February, from which they would need to set aside $756.07 a week to meet the mortgage payments on a lower quartile-priced home ($629,500), which would be 47.9% of their take home pay.

The report considers housing to be affordable when mortgage payments total no more than 40% of take home pay, but it does not take in account other property-related expenses such as rates, insurance and maintenance which would be likely to be significant.

Benefits of falling interest rates more than negated by rising house prices

The report also shows that in Auckland, the benefits of falling interest rates have been more than negated by rising house prices and low income growth over the last two years.

In February 2014 the average of the two year fixed mortgage rates offered by the major banks (which is the figure used for the report's mortgage payment calculations) was 5.96% and by February this year that had dropped to 4.54%.

But over the same period the lower quartile selling price of Auckland homes rose from $478,800 to $629,500.

That meant that even when the lower interest rates were allowed for, the mortgage payments on a lower quartile-priced house in Auckland increased form $646.30 a week to $756.07 a week over the same period.

So even with lower interest rates, the mortgage payments on a lower quartile-priced home were $109.77 a week higher in February 2016 than they would have been in February 2014.

Low income growth also an issue

However relatively low income growth is also an issue.

Over the same two year period, the median take home pay for typical first home buyers increased from $1501.44 a week to 1579.50, providing them with an extra $78.06 a week.

That means that Auckland's house prices have risen so much over the last two years that they would have more than wiped out the effects of falling mortgage interest rates and rising incomes, steadily pushing home ownership further out of reach for typical first home buyers.

The report also highlights how much worse off first home buyers are in Auckland compared to those in other parts of the country.

In Wellington the lower quartile house price was $360,200 in February and the mortgage payments on that would have been a much more affordable $409.44 a week, taking up just 25.4% of typical first home buying couple's take home pay.

In Canterbury the mortgage payments on a lower quartile-priced home would take up just 25.8% of typical first home buying couple's take home pay and in Waikato/Bay of Plenty it would be 23.2%.

So in Auckland, mortgage payments are likely to be eating up almost half of a typical first home buying couple's income, while in other main centres mortgage payments are are likely to chew up around a quarter of first home buyers' incomes.

That has enormous long term economic implications for young people living in Auckland

With so much money tied up in mortgage payments they will have less to spend on other things, reducing the money flowing into the rest of the Auckland economy and it will also substantially reduce their ability to save for retirement.

The size the mortgages young people will need to take out to purchase a home in Auckland is becoming so great that it will create a millstone of debt that will hang around their necks for most of their working lives.

That risks creating an economic underclass of people in Auckland that will not exist to the same extent in other parts of New Zealand.

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